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So far this looks like just a correction

posted on January 22, 2010 at 11:33 am
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Lots of investors have been waiting for a correction, arguing that no market can go only straight up and that the longer stocks go without a 10% correction they riskier they became.

Well, it looks like we might be about to get that correction.

The Dow Jones Industrial Average fell 200 points on Thursday January 21, for the worst two-day decline since the last correction in mid-June to early-July 2009. The Standard & Poor’s 500 Stock Index closed on January 21 down almost 3% in two days. That’s the index’s worst decline since a slide in October.

During the rally that started in March 2009 corrections have been short and shallow with declines in the neighborhood of 5% rather than the more typical 10%.

This time I think I think we could get a decline of more than 5%. Why do I think that?

On the technical side, the Dow Industrials broke through their 50-day moving average on Thursday. First major support is at 10,200, about 200 points below Thursday’s close.

On the fundamental side, the financial sector, which had been the best performing sector in 2010 before the downturn, has led the market down on fears that Washington will actually pass something that will hurt bank profits. Judge for yourself how real that fear is. We’re talking about Congress here, remember?

I take fears that China is about to begin a significant tightening of bank lending and the country’s money supply more seriously. (See my post http://jubakpicks.com/2010/01/21/sentiment-shifting-on-china-is-a-buying-opportunity-ahead/ ) I think we are seeing the first signs of a tighter monetary policy in China, likely to be made official after the People’s Congress meets in March. Those fears have pushed down prices for the steel, metals, and mining stocks in the Materials sector. (To track this use the Materials SPDR ETF (XLB).)

But I think the first moves in China will be tentative. The government would like to slow growth a tad but we’re talking about attempt at fine tuning to lower growth from the fourth quarter’s 10.7% to something closer to 9%. That’s not a huge change and no really big change in monetary and economic policy is likely in China unless inflation really starts to rip higher. That’s an issue for the second half of 2010 in my opinion.

So far at least—and I don’t think a 5% or even a 10% correction would change this—the longer term upward trends in stocks remain intact. As long as that’s the case I’d use any correction here as an opportunity to put money now on the sidelines to work.

I’ll try to monitor the correction as it develops and suggest some stocks to buy if this works out as I now believe it will.

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  • DJBarber on 22 January 2010

    Well, I gotta say, I came to the same conclusion. What I noticed over the last few days is that every stock in Jubaks picks (With the exception of one stock) was down. Which quickly told me that this was an across the board, taking money off the table. Some sectors were hit a bit harder than others, but then some sectors have “out performed” since the beginning of the year.

    And as far as what you have said about China in this blog, I am happy to say that that was exactly what I was thinking as well. China has to continue along the same path as they have been on, trying to bring prosperity to the largest number of people possible. The alternatives are far too nasty for the ruling party to contemplate.

    To some degree, Jim, your articles over the years have taught me a great deal about some of the larger ideas behind what has been moving the markets, and the long term trends therein. It has also given me the understanding necessary to be able to understand the “trend makers” and the “trend breakers”.
    Thanks so much for passing along your knowledge.

    Personally, if I were policy makers in China, and I understood that the second half of this year will be difficult for U.S. earnings, I would get my house (Inflation) in order right now rather than waiting. I would want to position my boat in such a way so that when investors are beginning to see a slowdown in the states, they have someplace else to put that money, someplace else that has shown a willingness to control inflation up front, and deal with bubbles on the front end, rather then living with the nasty results later.

    I agree that any changes in China will be fine tuning, they want growth to move along at 10% they will not do anything that endangers that kind of growth.
    I agree that any changes in China will be fine tuning, they want growth to move along at 10% they will not do anything that endangers that kind of growth.

    And I still believe that your idea that Potash, Moly and Iron ore are demand driven, without enough supply to meet demand, will continue intact for some time.
    And if China can get on board and make the necessary changes to give the people enough power to raise consumption by 10 to 20%, 30%I think the China story will not only remain intact but continue to grow.

    I am far far more worried about the US’s ability to take care of business then I am worried about China.

  • georic on 22 January 2010

    DJBarber, just don’t forget that what happens to capitalists, particularly western capitalists, whether you lose your shirt on their shares, is probably the least of Chinese concerns

  • trying 2 learn on 22 January 2010

    How much do you have on the sidelines Jim? I try to keep up with you on cash position and I think it is 25 30% – correct?

  • YX on 22 January 2010

    That’ why I have been busy putting out low buy offers.

  • YX on 22 January 2010

    Thanks Jim for another timely posting. That’s why I check your blog several times a day. I had put out bunch of low limit buy orders out there.

  • DJBarber on 22 January 2010


    Clearly you are correct. But what they do have to worry is a hugh population, that if not kept happy, will show it in the streets. That could and would go along way toward knocking the China train off the tracks, and those folks in China are very interested with keeping the train on the track, for thier own preservation.

  • sk on 22 January 2010

    Jim, what are you thoughts on the Elliot wave theorist. They seem to be predicting a huge sell off in the market?

  • Jim Jubak on 22 January 2010

    sk, I’m not an Elliot wave guy myself. But from what I can tell right now reading the folks who are, there’s a huge debate at the moment about what stage of the cycle we’re in. Folr example this from Briefing.com’s technical guy this morning: “On a short term basis the Elliott Wave pattern highlighted in the 60 min chart below if of importance to me. Will we end up with a potential five wave pattern off 1150 (which would argue for at least one more similar sized leg lower after a bounce) or will we formed a limited correction not far from the recent highs ?”

  • DJBarber on 22 January 2010

    ETF option bets hint at stocks correction soon


    “After a positive start for the year, a sudden three-day reversal on Wall Street has raised the specter that a larger technical downside correction, perhaps of a magnitude of 20 percent, is looming in the first quarter”

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